NCUA's RBC Pitch Falls Flat in Orlando
If the NCUA's luncheon session at last week's NACUSO conference is any indication, Chairman Debbie Matz and crew could face hostile crowds during this summer's listening sessions.
The NACUSO audience's response to usually winsome Rick Metsger wasn't the worst reception I’ve seen for an NCUA board member, but it was a far cry from Metsger's debut onstage at GAC, where he had them eating out of the palm of his hand.
In Orlando, nobody laughed at his jokes. Nobody even cracked a smile.
And most importantly, nobody bought what he was selling: That because the risk-based capital rule only causes some 200 credit unions to slip below well-capitalized status, it is nothing to fear.
I can't imagine any credit union has net worth to spare, even if it is currently managing a comfy safety cushion well above 7%. Should a credit union lose any capital ground under the RBC rule, members would have to pay for the credit union to recover to its previous strategic capital levels.
Those numbers aren't arbitrary.
I’m sure, as Metsger claimed, some credit unions will find they have more capital under RBC standards than the current net worth measure.
But I’d also venture to guess those credit unions aren't among the industry's top performers, and probably shouldn't be held up as an example of balance sheet management done right.
Metsger's speech was followed by a panel of NCUA staffers who were more directly involved in writing the RBC proposal and NCUA's proposed CUSO rule. It took a while for the crowd to get rolling with questions for NCUA attorneys Pamela Yu and Frank Kressman and Director of Supervision D. Scott Neat.
But when it did, the frustration showed.
One audience member nailed the underlying problem with RBC. Risk brings reward in the form of higher returns, he said, which are the only way credit unions can build capital. The proposed rule so severely limits those risks, it may have the unintended consequence of reducing the industry's capital cushion, not increasing it.
I hope you thought about that as you wrote this rule, the executive told the panel.
A second audience member succinctly summed up regulatory overreaction to the financial crisis.
“We move money for a living. It's inherently risky. You can't regulate the risk out of that,” he said.
Neither of those comments are Earth-shattering observations, which is why I was stunned the panel didn't prepare better responses. I sure hope Matz has something better than the deer-in-the-headlights expressions displayed by the NCUA staffers, or things could get ugly this summer.
I don't think credit unions are upset they will be subjected to RBC. Instead, the problem is that the NCUA's proposal – specifically, asset risk weighting – is far more conservative than what Basel requires of bankers.
Additionally, the NCUA tries to address other balance sheet risks with its RBC rule, like interest rate risk, concentration risk and credit risk.
The CEO of a large credit union recently sent me a copy of his comment letter to the NCUA on this proposed rule. The 20-page letter was very well written and included several charts and graphs that illustrate how poorly the rule compares to Basel, and the negative effects the rule would have on the industry and his credit union.
The CEO also proposed specific ways the NCUA could adjust its risk weights so they more closely match Basel.
And, he pressed the point that a capital rule is a poor tool for managing additional risks. Yes, interest rate, concentration and credit risks are a concern. But, he said, this rule is not the way to avoid losses due to those risks in the future.
I agree with him, and it appears banking regulators do too.
Further, the CEO said the rule would be yet another hit to the credit union charter, which is already unfavorable compared to bank charters thanks to field of membership restrictions, the MBL cap and lack of supplemental capital. Effectively reducing real estate lending and MBL balances may help NCUA officials sleep better at night, but it's a short-sighted solution, and he called it not viable.
Again, I agree.
I caught up with Metsger right after the lunch session, and he assured me the NCUA is making major changes to the RBC proposal. Specifically, it sounds like the regulator is going to adjust its proposed risk weights.
Let's hope so. As much as journalists love controversy, nobody wants to see a return to the contentious days of corporate reform.